Denver grapples with Calif. crisis

Bad timing for city's investment in SoCal Erin Johansen Business Journal Staff Reporter

The city of Denver invested $19 million in utility provider Southern California Edison on Dec. 18, the same day California Gov. Gray Davis said that the company "may not make it through the week" financially, due to spiraling electricity costs.

The city's timing came on the heels of a Dec. 14 investment of $15 million in the utility's parent company, Edison International (NYSE:EIX), which was placed on credit watch for a possible downgrade by Moody's Investor Service three months earlier.

And the city -- or more accurately, the taxpayers -- could lose some or all of the $34 million investment if these ailing companies file for bankruptcy and are unable to make good on their debts.

A huge increase in the wholesale cost of electricity, combined with a cap on what California utility companies can charge their retail customers, has put California's major utility providers on very shaky ground, with speculation that at least two, including Southern California Edison, may file for bankruptcy.

Denver's mid-December investments were made in commercial paper, a short-term security that is an authorized investment under the city's charter and investment policy. On Jan. 5, Moody's downgraded the commercial paper for both companies from P1 to P3, and on Jan. 16 it was downgraded again, from P3 not NP, or "not prime," the lowest possible rating.

The $15 million was invested from the city's general fund and the $19 million was invested from the city's airport reserve fund.

"Until the 30th or 31st, the city has lost no money," said Bob Gibson, director of financial management for the city of Denver. The investments are not scheduled to mature until Jan. 30 and 31.

But based on its default of $32 million in commercial paper that matured on Jan. 19 and its simultaneous announcement that it had suspended payments on an additional $223 million in commercial paper due to mature between Jan. 19 and the end of the month, the likelihood that Southern California Edison will repay Denver its $19 million plus interest on Jan. 30 appears slim.

The company also announced that it would not pay scheduled quarterly dividends on its cumulative preferred stock series on Feb. 28.

"At this point, they are not paying any of their debt," said Lori Woodland, director of global power ratings for rating agency Fitch Inc. "Timely payment does not look good, unless a miraculous settlement is reached."

And although ratings by Moody's Investors Service and Standard & Poors at the time of purchase were in line with the city's criteria, signs that the companies were in trouble began several months before the city invested its money.

"We rely heavily on ratings agencies," said Gibson. "It's not practical for the city to do its own analysis on all the commercial paper we buy."

Gibson added that these purchases have prompted the city's investment advisory committee to put a review of the criteria on the agenda of its next meeting.

"This has occurred in the past where downgrades have occurred quickly and it's not a comfortable thing," Gibson said. "Obviously we are quite concerned -- it is public funds."

Had the city relied on research and not just ratings when making its $34 million investment, it would have found a great deal of information indicating the companies were in trouble.

As early as Sept. 7 of last year, analysts at Fitch began watching California utility companies, specifically Southern California Edison and Pacific Gas and Electric Co., because at that time they were borrowing money to cover their debts. A week later, Moody's placed Edison International's commercial paper on credit watch for a possible downgrade.

On Nov. 7, Fitch assigned a "rating watch negative" designation to the securities of Edison International, Southern California Edison and Pacific Gas and Electric. At the same time, it downgraded Southern California Edison's commercial paper from F1+ to F1.

On Dec. 11, Moody's placed Southern California Edison's commercial paper on credit watch for possible downgrade and on the same day, Morgan Stanley Dean Witter downgraded Edison International from "outperform" to "neutral." Two days later, Standard & Poors placed both the parent company and its subsidiary on "credit watch with negative implications."

According to Gibson, the city was aware that some rating agencies had given the securities a negative watch for possible downgrade, but did not consider it alarming.

"It is not an unusual circumstance," Gibson said. "Securities can be on [credit watch] for years. Historically it is not unusual."

Will the companies file for bankruptcy? Nobody knows. However, if California's utility crisis continues without intervention from that state's Legislature, they may have little choice.

And although parent company Edison International is in a better position than its subsidiary, its board of directors has implemented several cash-cutting efforts, including eliminating its fourth-quarter common stock dividend that would have been paid on Jan. 31. According to the company's Web site, Edison has about 85,000 individual shareholders, many of whom invest conservatively for retirement income.

But Southern California Edison's problems could pull its parent company down. "There are attorneys who suggest that if the subsidiary files for bankruptcy, so will its parent," analyst Woodland said.

And if one or both companies defaults on its obligations, will Denver be repaid? "In the history of defaults, most are settled within the 30-day cure period," Gibson said.

But there is not a large history of defaults to draw on. According to a report issued by Moody's last October, only 11 of the 4,364 corporate commercial paper issuers that it has rated since 1972 have defaulted. Of these 11 defaults, 10 of the issuers were rated NP at the time of default and five were rated either NP or P-3 three months or more prior to default.

But Denver officials say they will get their money back. "We think the legislative process will take care of this," Gibson said. "All remedies take time."

http://denver.bcentral.com/denver/stories/2001/01/29/story1.html

Business Journal reporter Cathy Proctor contributed to this article.

-- Martin Thompson (mthom1927@aol.com), January 29, 2001

Answers

If they had been reading the GICC then they would of known even earlier that those stocks were about to hit the wall.
Again, Thanks Martin!

-- (perry@ofuzzy1.com), January 29, 2001.